When David Lee was elected to Wokingham council more than a decade ago, he was baffled by what the authority was doing with the new housing it had helped to secure.

"I couldn't understand why we always gave it away to registered social providers," he said. "Our own housing stock is getting older and when our houses need a repair it's a new roof or a new kitchen. But the homes that the social landlords were getting were all new, generating a good income and, over the next few years, if they needed repairs it would only be a new door handle. I thought it was madness."

Fast-forward 11 years and Wokingham, the Berkshire council where Lee is now leader, is building its own new homes after setting up a local housing company allowing it to channel the surpluses it makes into other spending areas. "There is a profit element, we are clear about that," says Lee. "Building the homes and keeping them ourselves gives us a dividend to fund other elements of the council's work."

Over the next five years, Conservative-led Wokingham is planning to develop 180 homes, some of them for shared ownership or sub-market rent – but many of them at low social rents, a priority in an area where private rents on a two-bedroom flat are about £1,000 a month. It's an example of how councils are increasingly becoming the lead – and in many places the only – providers of low-rent social housing.

Already, figures from the Homes and Communities Agency (HCA) show that, with housing associations asked over the last few years to develop homes at "affordable rents" of up to 80% of market rates, just 8% of the new affordable homes started in the six months to September 2013 were for lower, social rent. The HCA has warned that, under its next funding round, socially rented homes will only be funded in exceptional circumstances. That means councils are increasingly looking to their own resources, including borrowing freedoms extended in George Osborne's autumn statement last year, to build the lower-rent homes they feel their areas need.

As Matthew Warburton, policy adviser at the Association of Retained Council Housing, puts it: "It will be up to councils to meet the demand for housing at social rents which are affordable by those on the lowest incomes, particularly in areas where the gap between market and social rents is wide."

Gary Porter, leader of Conservative-run South Holland council in Lincolnshire and Local Government Association vice-chairman, says it's good that more councils are building again because they are both better landlords and better at getting a good deal for their area. "We get more bricks for £1 than registered social landlords and all of the profit is completely redistributed back into the community where it is generated from," he says. "There's no national [housing association] group shifting money around or lots of people taking out quite excessive salaries. And we do make better landlords because of the other things we do. We have a greater connection with the community."

In South Holland, the council has also set up a housing company and is developing homes at affordable rents, because of the comparatively low market rents in the area, as well as managing affordable homes built by private developers as part of their planning obligations. Porter says the government's recently announced review of how councils can deliver more homes should be looking at extending local authorities' licence to borrow. Councils are freer than they were to build, he adds, but further rule changes would allow them to deliver even more. "I wouldn't want people borrowing lots of money they can't service, but if it stacks up then let them borrow," he says.

Alistair McIntosh, chief executive of the Housing Quality Network, says councils have always wanted to get back into housebuilding – and now they are in a better position to develop at low rent than many housing associations."It's all about capacity. Housing associations have been under pressure to max out on borrowing and for a long time local authorities were under pressure not to borrow," he says. "Councils have always wanted to build more social rented housing and now they are the ones with more capacity."

Housing associations would like to see more flexibility of their own to build more at lower rents. Adam Morton, National Housing Federation policy leader, says it is an "inescapable truth that subsidised housing needs subsidy" and that under the current setup, housing associations have "little choice but to build homes for affordable rent, apart from instances where they can work in partnership with local authorities, who may provide land to support delivery and reduce costs".

"Housing associations are keen to offer genuinely affordable rents to those on low incomes, and in future should be given greater flexibility over the rents they charge," he says. "This would allow them to meet a wider range of housing need, by building homes with different rents, aimed at different people, with different incomes, in different parts of the country."

In the meantime, councils like South Holland see building at rents their communities can afford as the best way forward, rather than letting the housing benefit bill take the strain of higher rents."Where housing sits in the Conservative party there have been two schools of thought – putting subsidy into bricks and mortar or into tenants through housing benefit," says Porter. "We changed to tenants, which I personally think was a mistake. I think the money is better put into bricks and mortar."

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